World Economy

Spain Warned of Plunge in Economic Growth

Spain Warned of Plunge in Economic Growth
Spain Warned of Plunge in Economic Growth

Credit ratings agency DBRS is warning that the uncertainty surrounding Catalonia’s independence bid is hurting the region’s economy and could become a drag on Spain’s economy and weigh on public finances.

DBRS says the political turmoil brought by Catalonia’s standoff with the national government “is discouraging investment and tourism in the region”, AP reported.

With Catalonia representing about one-fifth of Spain’s annual GDP, any slowdown in the region would bring consequences for the national economy.

The Spanish government has revised downwards its growth forecast for 2018 to 2.3% from 2.6%, largely because of doubts over Catalonia’s future.

DBRS says the effects on the national economy will be “manageable”, however, unless the crisis becomes protracted.

Spain’s prime minister says the government’s plans to take unprecedented control of Catalonia’s key affairs and halt that region’s push for independence are “exceptional” and he hopes they will not last long.

Mariano Rajoy told parliament on Wednesday that the application of the Constitution’s Article 155 is the “only possible” response to restore the region’s legality, which he said has been liquidated by Catalan president Carles Puigdemont’s push to secede.

Rajoy says he hopes the measures planned, including the sacking of Puigdemont’s government and curtailment of Catalan parliament’s powers, will be brief. He says they should end with regional elections that he hopes can be held as soon as possible but only once law and order is restored. Spain’s Senate is expected to approve the measures Friday.

Rajoy last weekend, too, called for Article 155 to be implemented in an effort to stop a secessionist bid by the regional Catalan government following an outlawed Oct. 1 referendum that Puigdemont said gave him the mandate to declare independence.

Meanwhile, an independent Catalonia would be forced out of the European Union and euroland  which would directly hurt the regional economy, the Spanish economy minister said on Wednesday.

“It’d be out of all the treaties, 70% of its gross domestic product would be subject to tariffs and physical borders. It would be out of the eurozone and the banks wouldn’t have ECB coverage ... it would have to create its own currency which would be very depreciated,” Luis de Guindos told the parliament.

Such a depreciation would lead to an estimated 25-30% drop in regional economic growth, elevated inflation and a doubling of unemployment rates, he said.

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